August 16, 2011

Another year of even more OI research

At #AOM2011 on Monday, I was reminded that the first OI session at Academy was the 2004 PDW that Hank Chesbrough and Wim Vanhaverbeke organized in New Orleans. Within 48 hours, I had expressions of interest for the academic book (both by authors and publishers) that the three of us then published with Oxford in 2006, with chapters that were also excerpted in the 2005 Showcase Symposium that I organized and chaired in Honolulu.

This week in San Antonio, I attended 2½ OI sessions (late to one) as well as a crowdsourcing session and some other sessions in innovation and entrepreneurship.

It’s difficult to synthesize a 90 minute session in a blog entry — although discussant Juan Alcacer of HBS did a great job. But if anything held the papers together, it was this focus on value creation vs. (or with) value capture.

Brusoni & Prencipe

The dynamic duo of Italian innovation research, Andrea Prencipe and Stefano Brusoni, presented their conceptual paper about innovation coupling that attempts to answer the question: when is it best to be open and when is it best to be closed. The closed story is fortunately similar to those we’ve seen in proprietary platform research for years: firms promulgate proprietary platforms early in a technological regime when their end to end coordination is highly valued. (Prencipe/Brusoni call this “responsive”).

The fundamental concept behind the paper was that we need to consider how firms couple their organizational units — both the strength and the linkage of the units. Their propositions about the optimal coupling depended on the environmental ambiguity, complexity and uncertainty. (Alcacer quite reasonably asked: what about firm-specific factors that influence the decision, or external factors such as appropriability or munificence.)

Beyond the when closed (or open) idea is the unexpected corner of the 2x2: when firms have to be both closed and open. While Chesbrough (in the Chesbrough funnel) talks about combining open and closed strategy, I don’t recall anyone ever making a case that firms need a special competence in being able to shift between the two. (Both Alcacer and I felt the construct was reminiscent of the Tushman-O’Reilly concept of an ambidextrous organization.)

Cassiman & Valentini

The two middle papers were empirical ones. Bruno Cassiman and Giovanni Valentini did a large-N study following up on the Cassiman and Veuglers (2006) Belgian CIS study. After selecting only firms that are innovation active, they they compared the innovation performance of firms that bought innovation (inbound OI), sold innovation (outbound OI), both or neither.

Following directly from Chesbrough (2007), the prediction would be the firms that do both would be the most successful: reducing their costs and incrementally increasing their revenues.

Alas, that’s not what happened — according to their econometrics thus far. With various controls and outcome measures — most about new products divided by some control — the buy/sell were consistently the worst. In at least one formulation, the buy-only and sell-only cases were twice as efficient as the other two cases.

We all scratched our heads over this one. As Cassiman noted, there is a theoretical (and well understood) complementarity of make vs. buy, but perhaps not of sell vs. buy. Some people wondered whether it’s a short-term effect: that over time such firms will be more successful.

Or it could be another manifestation of the finding of Dries Faems and colleagues (2010) that OI can raise costs more than revenues. Certainly the presumption of rationality does mean we expect firms to accurately estimate a priori the returns from a hybrid strategy, particularly early in a new bandwagon like OI.

As I sat there, I worried strongly about the endogeneity of the buy/sell decision — not from a methodological standpoint, but a theoretical one. (Easy for me to say, since I don’t try to do carefully controlled large-N econometric studies). Like other small countries, almost all the local companies are SMEs. We know that there is great variation among SMEs — some really good companies and some really struggling ones. Without having a better sense of why firms are pursuing (this unusual) strategy, I’d be cautious about trying to interpret the finding.

Vanhaverbeke

Next up was Wim Vanhaverbeke of Hasselt, Leuven Gent and Esade. (He’s holding more permanent faculty positions simultaneously than most people hold in their career.)

Wim has gone from a big firm SMJ-kinda guy to focusing on OI in SMEs. Of course, the first paper on this subject was van de Vrande, de Jong, Vanhaverbeke and de Rochemont (2009).

He gave us a taste of his in-depth study of OI in 10 small and young(ish) companies — but only a taste as he tried to cram a 45 minute talk into 15 minutes. His paper also keyed of Chesbrough (2007), in this case on the centrality of the business model.

He claimed his study was of low-tech OI but several of the examples were very high-tech approaches in low-tech industries. Exhibit A was Quilts of Denmark, using rocket science to make a better quilt. QOD collaborated with Outlast to leverage NASA-licensed material to make Temprakon, a quilt that was warmer for cold bodies and cooler for warm bodies.

Three of the most interesting observations were confirming observations about SME strategy and showing their direct application to OI SME strategy. First, OI collaboration between firms depends on strong individual-level ties. Second, cooperation is easiest between two companies of the same size — i.e. the small firms have trouble working with larger firms.

Finally, academia’s most beloved open innovation blogger presented his own work tying together open innovation with open standards and open source, among other topics. This week’s paper — on a concept I call “strategic openness” — is a much more theoretical piece than the earlier West 2007)

The central motivation of the paper was the analysis of Simcoe (2006) on the inherent OI tradeoffs of value creation vs. value capture: not just that they are traded off, but that firms care about the product of the two, i.e. the total profit. Related arguments were made by West 2003 (in control vs. adoption) and West & O’Mahony 2008 (control vs. collaboration).

I got some very useful feedback at the session. I’ll be blogging more about this paper in a future article.

Alcacer

I had read Juan Alcacer but never met him. Far from being an open innovation advocate, he nonetheless was a great discussant — and not just because he liked my paper or that we both joked about Google’s announcement that morning of the Motorola purchase.

He saw all of the papers saying something about fundamental principles of open innovation — particularly the Cassiman presentation, which was testing a central tenet of OI. I was linking OI to strategy and competition, while Prencipe was examining the antecedents of OI. Wim has wonderfully rich and multi-dimensional data about how open innovation works in small companies.

Conclusions

This was a great session. The value was not just the people in the front of the room, but the great group of people in the room — all the top OI minds in Texas this week.

It was enough for me to tell my wife that it’s worth coming back to AOM next year — despite their price gouging strategy. (Alas, the rest of the conference was downhill from there).